The recent acquisition of Shaw Wallace by the Indian UB Group, owned by Vijay Mallya, created the world's second largest spirits producer by volume and significantly enhances UB's already powerful position. Umesh Madhavan and Yvonne Kok of Euromonitor International examine the deal and its implications.

It is of little surprise that UB Group and its chairman Vijay Mallaya have gone ahead with the acquisition of Shaw Wallace. Given the diminishing interest of the Chabbria family in the Shaw Wallace business, the timing was right for a buyout, though the price paid by UB is seen by some to be on the high side.

The competition in the domestic market would have been intense for UB had a multinational or a major domestic player bought Shaw Wallace. It was imperative for UB that it made the purchase rather than allowing it to go into the hands of any rival player. Of course, given the long history relating the two companies, it is also widely documented that Mallaya has been interested in the company on a personal level for a long period of time.

The acquisition provides the UB group, which currently owns three spirits companies, McDowell & Co Ltd, Herbertsons Ltd and Triumph Distillers & Vintners Ltd, with additional production capacity in the form of company-owned distilleries as well as distilleries with which Shaw Wallace has contract manufacturing arrangements.

The additional capacity can be used to manufacture the more profitable brands for the group. More specifically, there is immense difficulty in obtaining additional production capacity in India as there is a myriad of regulations and red tape involved when trying to obtain a distillery licence or expand current production capacities.

While the acquisition does propel UB further ahead in terms of spirits volume shares on both an Indian and global level, one can look forward to much juggling of the combined spirits brand portfolio. With over 140 brands, there are brands in the merged entity - likely to be named as United Spirits Ltd - that were hitherto pitted against one another and it will be interesting to see how the management goes about the task of streamlining this extensive brand portfolio.

Mallya said: "We can now accelerate the integration of the businesses of the UB Group and Shaw Wallace and move towards the creation of a unified spirits company. We do not look at the process as a classic takeover, but rather as a combination of businesses. In the coming days, we will adopt a best of breed approach, thereby ensuring that the most competent people and the most efficient processes are adopted by the combined business."

Euromonitor's view is that some of the lower margin/ low demand brands will be pruned to make way for the higher margin, high consumer demand ones. Brand pruning could be either in the form of brand sale or complete removal of production.

Brands likely to face the axe are Indian whisky brands like Old Tavern from Shaw Wallace and Vin whisky and Kerala Malted whisky from McDowell. Production of the latter two was reduced in 2004 in the wake of rising input price of molasses. Also likely to get the chop are brandy brands like Victory and Golden Grape from McDowell and Exshaw VSOP brandy from Shaw Wallace.

On the other hand, Indian whisky brands like Director's Special, Haywards and Royal Challenge from Shaw Wallace are likely to be paid great attention given the huge demand these have in the domestic market. Also of interest here is that the UB Group had earlier tried unsuccessfully to buy these brands back in 1999.

The 13 brands that sell over a million cases annually such as Bagpiper, McDowell's No 1 Whisky, McDowell's No 1 Brandy and Celebration rum from UB Group and Director's Special and Haywards from Shaw Wallace are also likely to spearhead the combined entity's fortune in future years.

The combined entity is also likely to derive savings in promotional spend as well as distribution costs. That said, the combined company may not be able to leverage on its superior market share to wield substantial influence on margins, given the fact that bulk of the distribution especially in the major spirits market of South India is controlled by the respective state governments.

Given the complexities of taxes and the difference in tax rates/import duties charged on movement of liquor from one state to another within India, it is an advantage to have a geographical spread for a said company's distilleries. That said, it is unlikely that Shaw Wallace will provide a major advantage on this front as the distilleries for both the companies are more or less located in the same state, with the UB Group having a superior geographical coverage.

Looking further ahead, as the acquisition was almost completely debt financed, it is quite possible that UB could sell a stake to a foreign player/financing company to meet the related costs involved.

The company is also looking at further acquisitions and Mallya is committed to international expansion. With this deal making UB the second largest spirits producer in the world by volume, Mallya has even stated that he is eyeing the possibility of taking over Diageo as the world's largest producer. Although UB is still some 25m cases short of that target, Mallya is clearly bullish about the group's growth potential. "There is strong organic growth," he said. "If we are able to make certain strategic acquisitions, then the leadership position is well within reach in five years."

Moreover, given UB's expansion aspirations beyond India, international groups will no longer be able to view the group as a large but local player of less relevance than other international rivals. The fact of the matter is that UB is a powerful and growing force with virtually unrivalled mass in some of the very development markets which multinationals such as Diageo are looking to for growth.

Meanwhile, the Indian spirits industry could be set for further consolidation/ buy-outs with another leading spirits player, Jagatjit Industries, rumoured to be interested in selling part of the promoter's share of the company, with both domestic and international buyers like Whyte & Mackay and Allied Domecq reportedly showing interest. Interesting times, indeed.